The gift that keeps on giving for protectionism

Ah, the Democratically-controlled Congress -- is there any step towards economic liberalization that they won't block? Don Phillips, "U.S. Withdraws Plan on Foreign Investment in Airlines, Disrupting Open-Skies Treaty," New York Times, December 6, 2006: The Bush administration withdrew a plan on Tuesday to give European airlines more freedom to invest in American airlines and to participate in management decisions, bowing to opposition expected to deepen in a Democratic-controlled Congress. The decision deals a blow to greater cooperation between United States and European airlines. Europe had made the investor rule a condition for putting in place the so-called open skies treaty with the United States, which is needed to allow airlines based in Europe or the United States to fly with little or no restrictions to each other?s territories. Such flights are now often subject to government-to-government negotiations. The open skies treaty, which has been agreed to by the United States and the European Union, is far more important on both sides of the Atlantic than the separate foreign ownership rule. Europe could easily allow the open skies treaty to take effect at any time, but it has made such an issue of tying the two together that it now faces embarrassment if it appears to give in. Yet Tuesday?s development is probably not the end of the negotiations that govern international air accords, said Mary Peters, the transportation secretary, whose agency issued the ruling.... The European transport commissioner, Jacques Barrot, told the Associated Press that the European Union was disappointed with the decision, saying that scrapping the foreign ownership rule had been an essential element in concluding a deal on the separate open skies issue. Nonetheless, Mr. Barrot said negotiators planned to meet again shortly. The foreign ownership rules would have changed a series of administrative decisions that have been interpreted to strictly limit the ability of any European airline investor to participate in the management of an American airline. European airlines said the rules were so strict that a United States citizen with a single share of stock would have a greater say in airline management than the European airline investor. The rules have led European airlines to sell their interests in American carriers. Even if the Bush administration had approved the proposed rules, foreigners would still have been limited to 25 percent of voting equity in United States airlines. Aviation specialists say Europe will probably approve the open skies accord in 2007, even if there is no action on the foreign ownership rules, because Europe stands to gain even more than the United States. The foreign ownership proposal had been strongly opposed by influential members of Congress, unions and several major airlines led by Continental. British Airways was also cool to the idea because it would have allowed the open skies rules to go into effect, giving other airlines greater access to Heathrow Airport, which it dominates. Representative James Oberstar, a Democrat from Minnesota who is expected to become chairman of the House Transportation and Infrastructure Committee, commended Ms. Peters for her decision. Mr. Oberstar said Ms. Peters chose to do the right thing in the face of strong pressure from the administration and from the European Union. I was curious about he substantive reasons why unions were opposing this particular agreement, seeing as the sweatshop argument did not seem credible. You see some of the union arguments by clicking here and here. As near as I can determine, the primary reason for opposition is based on simple protectionism akin to the Dubai Ports World episode-- they simply do not want to see foreign ownership and control of U.S. carriers. As for the benefits of an Open Skies arrangement? One union head argued that since the benefits are likely to be realized in the medium to long-term, there's no real cost to scuttling the arrangement. Gonna be a long two years..... UPDATE: This FT story by Doug Cameron and Andrew Bounds provides some more context for the Open Skies agreement: The grounded open-skies deal was only half the prize sought by both sides. Ending most market-access restrictions would have triggered a second round of talks aimed at creating an Open Aviation Area (OAA), with more alignment of safety, security and competition policy and, perhaps, investment and ownership rules.... Governments and airlines have sought for two decades to find a way to replace the 1944 Chicago Convention which governs the industry. This requires new routes to be negotiated on a bilateral government-to-government basis for airlines that are ?nationally? owned and controlled. That was the opportunity presented by the OAA between the US and EU, and one closely-watched by regulators in other trade regions. Mary Peters, the US transportation secretary, admitted this week that the thorniest issue of all ? foreign ownership and control of US airlines ? remains politically unpalatable. Congress rejected a move to raise the 25 per cent ceiling on voting rights by foreign investors in 2003, and the incoming Democratic majority appears in no mood to move on the issue. Ms Peters is also unwilling to sacrifice progress in other areas ? such as solving the broader congestion in the US transportation system ? by alienating Congress.ANOTHER UPDATE: The Los Angeles Times' Paul Thornton has more on the killing of this deal (hat tip: Virginia Postrel). He also addresses the national security concern -- as I suspected, it's about as well-placed as the Dubai Ports World fiasco: A "homeland security risk"? All the DOT's proposal would have allowed is non-citizens to hold executive positions in airlines that oversee purely economic decisions (think fares, routes and aircraft purchases). The proposal explicitly -- I repeat, explicitly -- walled off non-citizen managers from having any say in an airline's security. In fact, the DOT proposal would have left the 25% foreign ownership cap completely intact; it even had the blessing of the Department of Defense.... But the anti-foreign ownership and Open Skies troupe in Congress isn't appealing to our economic sensibilities. If they did, doubtless they'd lose (imagine running for re-election on "I voted to increase ticket prices on transatlantic flights!"). Instead, their arguments have a xenophobic tinge, relying on our assuming that non-citizens are somehow less trustworthy than Uncle Sam's own kids to run an airline. Economics aside, that's the biggest problem with Oberstar and the protectionist crowd.